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Inadequate Stock Price Reactions; Evidence from Prague Stock Exchange

Author

Listed:
  • Lukas Marek

    (Department of Finance, Faculty of Economics and Administration, Masaryk University, Brno, Czech Republic)

  • Ludek Benada

    (Department of Finance, Faculty of Economics and Administration, Masaryk University and Department of Finance, Mendel University, Brno, Czech Republic)

Abstract

The paper examines how effectively a price-generating information is incorporated into the stock price. The research is dedicated to the fourteen main stocks on the Prague Stock Exchange. The investigated period was November 2012 - December 2018. The research applies a test for identifying significant price-related information, a so-called swap variance test. We analyse a price response to such information shocks. The results include both positive and negative shocks, where the positive ones are more frequent. A further exploration confirmed the existence of short-term and mid-term underreaction in the case of positive news and short term underreaction in the case of negative news. The evidence of abnormal returns identified the presence of an information inefficiency on the investigated market. The inefficiency related to negative information shocks arrives much earlier, but also lasts only for a couple of days. On the other hand, our results show that positive information shocks are more pervasive according to a portfolio holding period. We deduct from the results that investors perceive losses and gains differently and thus behave differently following the unexpected stock related news. In overall, the investors act more precise when the stock price tumbles.

Suggested Citation

  • Lukas Marek & Ludek Benada, 2020. "Inadequate Stock Price Reactions; Evidence from Prague Stock Exchange," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 70(4), pages 332-349, October.
  • Handle: RePEc:fau:fauart:v:70:y:2020:i:4:p:332-349
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    File URL: https://journal.fsv.cuni.cz/mag/article/show/id/1467
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    More about this item

    Keywords

    market efficiency; price jumps; swap variance; underreaction;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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